Did the Gold Standard Cause the Great Depression?

22 responses so far

• 1 fact checker // Sep 21, 2009 at 4:35 pm

  man did you need a new book to teach you that about a gold standard

  econ 101 a country should have the freedom to set its own monetary policy. A gold standard puts monetary policy in the hands of the world suppliers of gold.
  Did it take you a new book to teach you that ron paul is a crackpot ?

  thank god for fdr btw do you still buy that Amity Shales nonsense ?

  and btw mr frum re your lat article. Just like medical care office space, support staff salary, housing etc etc are more expensive in NJ than Kansas think that might be a cause of the higher cost of healthcare ?

  learn some economics before you write about economics

• 2 WillyP // Sep 21, 2009 at 5:42 pm

  “It’s super hilariously ironic that modern monetary cranks of the Ron Paul variety now combine enthusiasm for gold with opposition both to an American central bank and hatred of international monetary cooperation – the two ingredients absolutely essential to sustaining the ancient currency regime for which they claim to yearn.”

  One is tempted to reply that the editor/author is an ignoramus, or just plain dense. And also tempted to point to the record of the Fed on tempering the economy and ‘controlling’ inflation.

  See the discussion here:
  http://www.newmajority.com/ron-pauls-fatuous-anti-fed-book

• 3 sinz54 // Sep 21, 2009 at 5:48 pm

  fact-checker:
  

  Just like medical care office space, support staff salary, housing etc etc are more expensive in NJ than Kansas think that might be a cause of the higher cost of healthcare ?

  Studies have shown that the higher cost of healthcare is due to demographics (aging and increased life expectancy of the population), and the use of the latest whiz-bang technology that can indeed increase life expectancy but at a very high cost. The cost of office space pales compared to the cost of doing dozens of MRI’s every single weekday in every hospital in America.

  From this week’s U.S. News & World Report:

  In the 1980s, if you had a heart attack and went to the hospital, you had about a 60 percent chance of living a year; today, it is more than 90 percent. The rapid development of new medicines and technologies has transformed the health of the American public—but such innovations come at a cost. They are responsible for as much as two thirds of the annual spending increases in healthcare.

  We might like to get back to the costs of 1980, but nobody is willing to go back to 1980 medicine. Americans want the most advanced diagnostic tests, drugs, and surgeries, and doctors want the freedom to prescribe them.

  There is much to learn in the legislative history of healthcare, notably in the formation of Medicare and Medicaid under President Johnson. One authority on this is Johnson’s former senior domestic policy aide and later secretary of health, education, and welfare, Joseph Califano, who wrote about the failure then to anticipate the costs associated with medical discoveries and changes in longevity. “No one had discovered MRIs, PETs, CAT scans, organ transplants, and exotic and expensive cancer chemotherapy,” he said. “None of us anticipated the extraordinary leap in the life expectancy that would lead Medicare to spend a third of its budget during the last year of a beneficiary’s life and Medicaid to pump an even larger proportion of its dollars into nursing homes. Now we are in the early days of a revolution in neurology, genetics, molecular biology, stem cell research, mechanical hearts and lungs, and domino transplants that promise all sorts of (costly) cures that don’t exist today.”

• 4 sinz54 // Sep 21, 2009 at 5:51 pm

  WillyP: The gold standard didn’t prevent depressions or panics, some of which were deep and long. We had many such in the 19th century. So did Europe.

  There was never any “golden age of capitalism” in which the economy just kept rising and rising in a stable fashion.

• 5 WillyP // Sep 21, 2009 at 5:56 pm

  monsieur/madame sinz:
  i’ve heard you ramble on incoherently for many paragraphs, proving your complete ignorance and unsurpassed ability to think yourself more clever than you are.
  the plain truth of the matter is that a gold standard is only the first line of defense against reckless monetary policies. you also need to do away with fractional reserve banking in all its forms, as well as the central bank.

  fact-check was more more right than he realizes when he stated, apparently obliviously, that “econ 101 a country should have the freedom to set its own monetary policy.” if ‘country’ he meant the people of the country, i agree. abolish legal tender laws and let the market choose a money that is most conducive to trade. history shows that it picks GOLD.

  read this, and please spare everyone else of your delusional ramblings on matters of monetary economics.
  http://bastiat.org/en/what_is_money.html

• 6 JimBob // Sep 21, 2009 at 7:25 pm

  Neocons like Frum are going all out to discredit Ron Paul. Why? Israel. Ron Paul believes in a non interventionist foreign policy thus a heretic like Ron Paul must be destroyed. As Ronald Reagan wrote in his autobiography: ” Perhaps we didn’t appreciate fully enough the depth of the hatred and the complexity of the problems that made the Middle East such a jungle. Perhaps the idea of a suicide car bomber committing mass murder to gain instant entry to Paradise was so foreign to our own values and consciousness that it did not create in us the concern for the marines’ safety that it should have.

  In the weeks immediately after the bombing, I believe the last thing that we should do was turn tail and leave. Yet the irrationality of Middle Eastern politics forced us to rethink our policy there. If there would be some rethinking of policy before our men die, we would be a lot better off. If that policy had changed towards more of a neutral position and neutrality, those 241 marines would be alive today.”
  http://orangepunch.freedomblogging.com/2006/07/21/reagans-wisdom-on-the-middle-east-leave/

  No the gold standard didn’t cause the great depression. Cheap credit to pay off World War one debt caused the economic collapse. The same thing responsible for the current economic disaster!

  As for Ron Paul being a monetary crank, then I guess Henry Hazlitt the author of the biggest selling economics book of all time “Economics in One Lesson” still in publication after 63 years must be a crank too because his views were the same as Ron Paul’s. In fact Hazlitt wrote the introduction to Paul’s book “Gold, Peace, and Prosperity”

  http://mises.org/store/Gold-Peace-and-Prosperity-P401.aspx

  http://mises.org/store/Economics-in-One-Lesson-P33.aspx

• 7 greg_barton // Sep 21, 2009 at 11:47 pm

  Frum, don’t you know that to gain more political capital you pick fights with people more powerful than yourself? Badgering Ron Paul and his supporters is not an upward strike. At least, you’d better home it isn’t…

• 8 sinz54 // Sep 22, 2009 at 9:22 am

  WillyP:

  There is no evidence whatsoever that your ideas will produce any improvement in the business cycle. None.

  When the U.S. was first created in 1789, we had a de facto gold standard and no central bank. But we still had recessions and depressions. We created a U.S. national bank, but initially it was only competing with the regional banks. We still had depressions and recessions.

  Once again, I urge you to look at the economic history of the United States. We had recessions, depressions, panics, and widespread poverty (at near-starvation levels). There was never any “Golden Age” when things were much better than they are now.

  We’ve come through the latest economic crisis much better than they did in the 18th or 19th century. We don’t have starvation. We don’t have millions of beggars shuffling through the street with tin cups begging. We don’t have citizens forcibly evicted from their homes and apartments, sitting in the street amidst all their belongings.

  Doesn’t that tell you that your ideas are out of date?

• 9 bm // Sep 22, 2009 at 10:43 am

  Good work David Frum!

  To build a new majority conservatives need (among a lot of things) to break with crackpot, crank or voodoo economics. Among the harmful notions you should take up next is voodoo fiscal policy, especially the now exploded notion that one can reduce the size of government and public indebtedness by simply cutting taxes without taking the trouble (or having the balls) to cut spending. The silly-clever rationale was that rising deficits and debt would ‘force’ congress to curb spending. Pure voodoo of course. Liberals will beat conservatives at that particular game of chicken anytime. Just look at the reckless expansion of deficits and debt under Obama. Yet it was conservatives – including the golden idol Reagan – who have, as much as anyone, undermined any traditional culture of fiscal responsibility over recent decades and opened the door to what looks a major and rapidly approaching fiscal crisis.

  As for the price-specie flow mechanism (so well analyzed by David Hume), remember that for it to work as a means of macroeconomic adjustment you have to assume fully flexible prices and wages. That assumption was a lot closer to reality in the 18th century than it is today, when, with much stickier prices and wages, the impact of monetary fluctuations is first felt on output and employment. And one thing modern electorates do not want is volatility and risk in employment. We had also better get that under our belts en route to any new majority.

• 10 WillyP // Sep 22, 2009 at 11:14 am

  OK, I’m apparently not engaged with very deep thinkers here, from Frum to yoctobarryc to Sinz, but seriously… you cannot really believe that a proper theory of money is discredited simply by calling it “out of date.”

  The dollars we use today serve the same functions as when dollars were backed by gold. The natural uses of money do not change over time because human laws of economy do not change over time. People always trade to increase their satisfaction, and do so with money because money eliminates the problem caused by the “double coincidence of wants.” That is, you make shoes, I make bread. I want shoes but do not want bread – we cannot trade. Instead, we turn to a widely accepted commodity and engage, not in direct exchange i.e., barter, but indirect exchange, i.e., through using money.

  For some reason, people have a difficult time understanding that fractional reserve banking – that is, lending out more money than you have deposited – creates booms and busts. It has to, in fact. There is not way of avoiding the bust once you inflate the currency. Why is this? It is because you are creating additional specie that is not commensurate with an “equal” rise in goods. In other words, once more money is “printed” or lent, you have depreciated all the money theoretically, but are still working off the old prices, i.e., before inflation and the necessary devaluation in dollars. So in effect banks will finance projects that would not be and are not to be profitable at the rates of interest (because they are artificially induced, by virtue of fractional reserve banking) that would prevail on the pre-inflated market. In financial terms, you are giving projects a neutral or positive net present value which were previously negative.

  When a central bank “targets” interest rates it effectively inflates in a grand scale. It does this by flooding banks with cash for previously issued government debt. This process is called monetezation. It takes an illiquid asset and makes it a liquid asset. It converts debt into credit. Whereas before, if a bank wanted to lend more and do so by selling it’s T-bonds it would have to sell to a third party who would necessarily then LOWER their cash balance, when a central bank does this, it creates the money – it DOES NOT EARN IT. In other words, counterfeiting.

  Furthermore, whereas before, under a gold standard, banks engaging in fractional reserve lending were held in check with their reckless lending because of the fixed amount of specie in gold, now they are unhinged because the central bank can always inflate to avoid bank runs. This would be desirable only in a world unlike our own; an alternative world where printing additional money leads to real creation of wealth. Unfortunately, the world we live in has as a consequence of inflation a pending bust.

  Moreover, the reason we are not destitute (yet) is largely because of technological innovations that allow us to produce far more goods than we were once able to. This is real progress.

  Ironically, the whining and hapless economists and pundits who mock the “gold bugs” are of the same economic school as the ones running the Fed, the IMF, the World Bank, and the ECB. And yet they tell us our ideas are hopelessly unworkable, all while the world, and this country in particular, continues down the tragic path of economic ruin. Startlingly, many of these people are Republicans, purported conservatives, who must remember that to solve Carter’s depression, Reagan did exactly the opposite of what we’ve just done – increase interest rates, decrease taxes across the board, and (arguably) reduce spending.

  We now hear the recession is over. Well, you just wait. The other shoe will drop, and then, just maybe, some of the know-it-alls will start listening to Ron Paul’s monetary crankery.

• 11 sinz54 // Sep 22, 2009 at 12:45 pm

  bm:
  

  And one thing modern electorates do not want is volatility and risk in employment. We had also better get that under our belts en route to any new majority.

  That’s impossible.

  NO ONE, whether liberal economist or conservative economist, knows how to get rid of the business cycle. There will continue to be booms and recessions, and in recessions there will be higher unemployment. Any politician who promises PERMANENTLY low unemployment is lying to the public.

  bm:
  

  Yet it was conservatives – including the golden idol Reagan – who have, as much as anyone, undermined any traditional culture of fiscal responsibility over recent decades

  Not true.
  Reagan came into the White House determined to cut domestic spending. But he was still dealing with a House of Representatives with liberal Democrats in control–particularly the House Speaker, Tip O’Neill.

  Tip O’Neill refused to consider ANY cuts in domestic spending. He was opposed to the rest of Reagan’s agenda too–tax cuts, even military modernization to stop further Soviet expansion. He was just diametrically opposed to everything Reagan wanted to do–everything.

  Reagan was forced to cut a deal: Give up cuts in domestic spending, and Tip O’Neill wouldn’t stop Reagan’s tax cuts and military buildup. And that was what happened.

  So don’t blame Reagan for failing to make cuts in domestic spending. Blame the Democratic House. If the House of Representatives had been majority GOP, you would definitely have seen tens of billions of dollars in cuts in domestic spending.

• 12 sinz54 // Sep 22, 2009 at 12:51 pm

  bm:
  

  The silly-clever rationale was that rising deficits and debt would ‘force’ congress to curb spending. Pure voodoo of course. Liberals will beat conservatives at that particular game of chicken anytime.

  Not if those liberals are voted out of office. The real answer is to get rid of them.

  What we have NOT had, and really NEED, is a top-to-bottom conservative government, with a conservative President, a conservative Senate, a conservative House of Representatives, and a conservative Supreme Court.

  Then you would see some $900 billion in cuts to domestic spending. Because, as you admit, conservatives hate deficits and will cut domestic spending as long as there are no liberals to stand in their way.

• 13 sinz54 // Sep 22, 2009 at 1:06 pm

  WillyP:

  to solve Carter’s depression, Reagan did exactly the opposite of what we’ve just done – increase interest rates, decrease taxes across the board, and (arguably) reduce spending.

  Reagan did that in order to reverse Carter’s stagflation, the combination of high inflation and economic stagnation. It wasn’t a depression under Carter. Unemployment remained below 9%. But faith in saving and investment had been destroyed by double-digit inflation–people were pulling their money out of the stock market and buying hard assets with it. And the Dem Party’s fighting the soaring price of commodities with price controls led to severe shortages (particularly shortages of all forms of oil).

  We don’t have high inflation today. We don’t have supply shortages today. You can go to any auto dealer and see all the unsold cars. You can go to any gasoline station and pump as much gas as you want.

  What we had was a collapse of credit. It was NOT caused by central banks and reserve banking. (Because we didn’t have such a collapse of credit in the prior 50 years of the Fed’s existence.) Rather, it was caused by highly leveraged (30 to 1!) securitization of real estate, which is traditionally illiquid.

  This securitization was done by idiots who decided that real estate is ALWAYS a good long-term investment. It involved outright fraud, in which rating agencies like Moody’s were paid by the underwriters to give false “safe” ratings to those securities.

  So when the real estate boom finally went bust, those idiots were left owing far more money than they had on hand.

  It doesn’t matter what the Fed says or does. We’ve had tight money, loose money, high interest rates, low interest rates. But to leverage real estate 30 to 1 is stupid in any economy.

• 14 WillyP // Sep 22, 2009 at 4:31 pm

  “It doesn’t matter what the Fed says or does. We’ve had tight money, loose money, high interest rates, low interest rates. But to leverage real estate 30 to 1 is stupid in any economy.”

  It’s very hard to discuss the topic rationally when the person you are trying to communicate with does not even grasp the import of a controlling and manipulative monetary authority.

  Think about this: where did the funds come from to leverage out 30x? You should realize that with honest money these sort of leverages would be far, far too risky. On the other hand, when you’re putting up fake money and know that you’re essentially insured by the Federal Reserve and its ability to “print money,” 30x seems, contra idiotic, smart.

  “What we had was a collapse of credit. It was NOT caused by central banks and reserve banking. (Because we didn’t have such a collapse of credit in the prior 50 years of the Fed’s existence.) Rather, it was caused by highly leveraged (30 to 1!) securitization of real estate, which is traditionally illiquid.”

  No! The central bank created an asset bubble by lowering interest rates, facilitated by “printing money.” This IS what happened. It crippled our price mechanism, distorting our capital structure and investments. We need to recover from this lost period of economic illusion, and the only way to do that is to let prices readjust. Flooding the country with more money, as a matter of irrefutable logic, will make things WORSE.

  What is a collapse in credit anyway? It means that people are unwilling to loan. Why would they be unwilling to loan? Because they need to save more. Why would be they loaning all along when they were depleting their savings? Because the prosperity was illusory. What did we do when this illusion was lifted, and people increased their demand for cash holdings? We undermined them by printing trillions of dollars and throwing it at banks to loan out. To me, a clear way to muck up the currency and eventually country. Yet somehow this passes for enlightened policy.

  bm says “That assumption was a lot closer to reality in the 18th century than it is today, when, with much stickier prices and wages, the impact of monetary fluctuations is first felt on output and employment.”

  So prices are more sticky today than they were back then and this is why we don’t use gold anymore? And Ron Paul is a crank, right …this is sheer idiocy.

  I have gone through examples that relate the theory back to accounting and finance, and tried to tie it all in to make it very clear that the asset bubble was a direct result of the Federal Reserve. What more do you people want? All I hear from the deniers is that people are stupid and thought real estate was going to keep appreciating forever, and they offer no illustrative theory. When convenient, the deniers throw out their support and belief in the infallibility of supply and demand. They would do well to remember that it is true at all times and for all cases for purposeful action.

  I feel like a chemist among alchemists.

• 15 sinz54 // Sep 22, 2009 at 8:05 pm

  WillyP:
  

  Think about this: where did the funds come from to leverage out 30x? You should realize that with honest money these sort of leverages would be far, far too risky.

  A whole lot of that money came from sovereign wealth funds of foreign countries.

  As I just tried to explain to you,

  When there’s a lot of loose money lying around (whether from Fed liquidity or from foreign sovereign wealth funds), there are a lot of places you can invest it. You can buy commodities. You can buy shares of stock in the stock market.

  You don’t normally put that money into securitized mortages, because you know how highly leveraged real estate is. UNLESS the rating agencies have assured you that those mortgages are high quality and are safe.

  You’re such a gold bug. If all those investors had plowed all those loose money into investing in precious metals, or investing in blue-chip companies like Coca-Cola, then NONE of this crisis would have occurred.

  It was the responsibility of the rating agencies to warn prospective investors that these securities were packaged subprime mortgages issued to homeowners who would have difficulty repaying.

  They didn’t. They deliberately overrated those securities in return for fees from those securities’ issuers–what used to be called “payola.”

  We’ve had periods of loose money before this. But we never had a global blowout like this one–because we never had corruption like this. And because foreign sovereign wealth funds jumped into the secondary mortgage market, causing the disaster to spread worldwide.

• 16 joedee1969 // Sep 23, 2009 at 9:25 am

  How about the financial devastation this caused:

  http://americaspeaksink.com/2009/09/911-truthers-a-view-from-the-right/

• 17 WillyP // Sep 23, 2009 at 9:52 am

  “A whole lot of that money came from sovereign wealth funds of foreign countries.”

  A simple example will illustrate why this view is demonstrably fallacious.

  I live in the U.K. I want to buy some American goods. As I am conducting my day to day affairs in British Pounds, I do not carry a balance in USD. To purchase the American goods, therefore, I must first purchase USD (unless a specific arrangement has been made that allowed payment in pounds, an unlikely scenario).

  Under the system of floating exchange rates which is in place today throughout much of the world, there is a supply and demand for USD. In my purchase of USD, I must pay the market price, and find someone who is willing to exchange their dollars for my pounds.

  Note: there is no influx of dollars, only a reallocation. Likewise, sovereign investment funds cannot cause asset bubbles because they cannot create dollars – only the Federal Reserve can accomplish that dubious task.

• 18 sinz54 // Sep 23, 2009 at 1:26 pm

  WillyP:
  

  Under the system of floating exchange rates which is in place today throughout much of the world, there is a supply and demand for USD. In my purchase of USD, I must pay the market price, and find someone who is willing to exchange their dollars for my pounds.

  I agree with you, absolutely.

  The question is: What do you do with your dollars after you’ve exchanged your euros for them?

  Who told all these investors to invest in securitized mortgages???

  In that same period (2002-2004), I had some spare cash lying around. I didn’t purchase securitized mortgages. I bought gold and gold stocks. (In 2003, gold was around $350 per ounce. Now it’s over $1,000 per ounce.)

  Now if I, I’m no economist, I’m just your Average Joe, could figure out that gold was a better buy than securitized mortgages, then WHY DIDN’T EVERYBODY ELSE???

  WHAT’S THEIR EXCUSE???

• 19 WillyP // Sep 23, 2009 at 2:59 pm

  I can sympathize with you there – you are definitely not an economist. Though in truth an economist does not make a good investor per se. A smarter investor, perhaps, but not necessarily a good one.

  What you’re talking about is referred to as asymmetric information. Why did the ratings agencies rate these things so well? It’s a good question, but it has nothing to do with a fault of the free market. If anything, the party that got roasted the most from the collapse of subprime loans were the banks. I do not know why the ratings agencies failed, but it may have something to do with the fact that there are only two – Moody’s and S&P – and I believe they are legally protected monopolies (although that may be incorrect). Other guesses would be that they were pressured somehow by Fannie/Freddie through political channels.

  Still, my points remain – the bubble is impossible without the inflation from the Fed. And, without a Fed to bail out the banks, they would have paid the price for poor investments. I do not see how your wise purchase of gold from 2002-2004 proves any point except that you made a good decision, though it also shows how much the dollar has eroded against a fixed quantity of gold.

• 20 sinz54 // Sep 24, 2009 at 1:10 pm

  WillyP:
  

  Why did the ratings agencies rate these things so well? It’s a good question, but it has nothing to do with a fault of the free market.

  The concept of the free market assumes that none of the players engage in conflict of interest or outright fraud.

  In this case, the rating agencies were paid to rate securities, NOT by investors, but by the issuers of those securities. That meant their job was to help sell those securities.

  When you’re looking to buy a house, you’re escorted around by a realtor. But you should NEVER forget that the realtor is NOT working for you. She’s working for the seller. And hence NOTHING she says about the quality of a house should be trusted.

  That lesson was forgotten by stupid investors. I remember the time WorldCom went bankrupt. These rating agencies rated the stock a “HOLD” almost down to the time WorldCom filed for bankruptcy.

  But it gets worse.

  When some issuers of securities didn’t want to pay Moody’s to rate their securities, Moody’s took revenge by doing their own rating and deliberately downrating those securities. That’s extortion, and it’s blackmail, and it should be illegal in any free market.

• 21 sinz54 // Sep 24, 2009 at 1:12 pm

  WillyP:

  Looking forward, I think that hard assets are going to outperform the broader market, just as they did in the 1970s. It’s too late to invest in gold, it’s already risen too much. But opportunities still exist in other commodities.

• 22 WillyP // Sep 24, 2009 at 1:59 pm

  Sinz:
  “The concept of the free market assumes that none of the players engage in conflict of interest or outright fraud.”

  Actually, the idea is that conflicts of interest are resolved through the free market process (voluntary association), and it is the only effective way to check outright fraud.

  Worldcom, as I’ve said before, was an accounting scandal. Again, the closest thing you’ll find to an accounting scandal on a nationwide basis is currency inflation causing a boom/bust.

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